As imagined in Lewis Carroll’s classic, having gone down the rabbit hole, a bewildered Alice learns from the Cheshire Cat that, if you don’t know your destination, any road will take you there. Perhaps this explains much at the Federal Trade Commission these days, which, having gone down a regulatory rabbit hole, increasingly dwells in an antitrust Wonderland of its own creation. Consider the prosecution of Illumina ‘s acquisition of Grail, built on a theory that the merger of two firms—which don’t compete—will nonetheless harm purely potential competition for a market that, much like Wonderland, does not yet exist.
There is a wonder worthy of marvel here—the life-saving innovation that Illumina and Grail hope to accelerate. Grail is developing a revolutionary multi-cancer early detection test that analyzes fragments of DNA in the bloodstream to identify cancerous cells at early stages and which, as the FTC admits, could save thousands of lives from cancer every year. Grail relies on Illumina’s next-generation DNA sequencing platforms (transformative in their own right) to analyze the DNA in blood to determine whether a patient has mutations or other biomarkers associated with various cancers.
The FTC has misapplied the standards for vertical mergers in this case, as we detail in a recent report for the Competitive Enterprise Institute. For decades, a bipartisan consensus has focused antitrust law and enforcement on mergers of competitors; vertical mergers, such as this one, where firms do not compete, are rarely challenged. Many in the antitrust world have long believed that such transactions often produce consumer benefits. Accordingly, vertical mergers are evaluated case by case, rather than through presumptions or strict rules. Moreover, here the merger is not just vertical, the government concedes that the market for such cancer tests is pre-commercial, and any alleged harms would manifest themselves in markets not yet formed. In such cases the government has been even more cautious about proceeding, recognizing the danger of mistakes in the face of such uncertainty and the important benefits of encouraging innovation.
Yet, the agency’s staff, in its pretrial brief, apparently ignores these principles. Instead, in effect, they presumptively condemn the merger because Illumina is, to quote from the FTC’s complaint, “the likely leader in the [relevant] market… with the largest market share”—despite conceding that “market shares do not yet exist.” While such reasoning might work for the Cheshire Cat, the key evidence that antitrust enforcers would typically examine—for instance, similar past mergers or known effects from the consolidation—do not support its case, most notably Illumina’s prior acquisition of Verinata, a company that offered a noninvasive prenatal test for genetic abnormalities. The FTC rightly declined to challenge that merger, which has proved to be pro-competitive.
In theory, vertical mergers produce opposing incentives to lower and raise prices to consumers. The government’s own vertical-merger guidelines just repealed by the FTC on a 3-2 vote, teach that both must be considered together to determine accurately the merger’s effects. With the Illumina-Grail merger, there is considerable evidence of the former, but only speculative evidence of the latter, which would, in any event, only occur in the future and involve hypothetical products. In effect, the FTC staff’s case is built on theoretical fear of future price increases, ignoring the requirement to consider the possibility of a price decrease at the same time. In other words, the possibility of theoretical harm suffices to stop a vertical merger. The claims of reduced innovation are even more speculative, and similarly ignore the offsetting and near-term benefits of greater innovation by the merged firms. The staff would reverse decades of legal precedent to classify, without evidence, certain vertical mergers as presumptively illegal.
What’s more, unlike most merger challenges, Illumina and Grail have already proposed to address any concern about Illumina foreclosing Grail’s rivals from its sequencing platform. Illumina has extended its irrevocable long-term supply agreements to current and future customers developing or selling next-generation sequencing-based oncology tests to allow full access to its DNA sequencing platform. Such remedies have long been the FTC’s answer for concerns about exclusion. Indeed, the FTC’s own recent study on merger remedies concluded that this remedy can “provide the buyer with the ability to compete immediately in situations in which competition might otherwise be delayed or less effective” and that “this was the typical outcome in matters that included these agreements.”
Read the full article at Barrons.